How the IRS and State Authorities are Addressing the Pandemic
In response to the many negative impacts of the pandemic, the IRS and state authorities have presented a number of interesting options.
The IRS accepted digital signatures during the period ending July 15, 2020. This applied to extending the statute of limitations on assessments to specific tax matters or liabilities (closing agreements). It also included any other statement or form needing the signature of a taxpayer or representative traditionally collected by IRS personnel outside of standard filing procedures such as a Power of Attorney form. In addition, through the end of the year, Form 3115, Application for Change in Accounting Method, and Form 8832, Entity Classification Election, are some additional forms that have been added.
New York for the first time permitted digital signatures during this period on the forms needed to electronically file a tax return and has recently made this permanent. Hopefully, the IRS follows suit.
The IRS allowed taxpayers to send certain documents for which they accepted either photocopied or digital signatures via email during the period ending July 15. If a taxpayer or their representative wanted to email an IRS employee a document, then that employee would have to authenticate the identity of the sender by phone and verbally verify the email address. The IRS employee must also advise the taxpayer that such communications are not secured, and to redact as much identifying information as possible. The taxpayer must state in the email or attached cover letter that the document includes the taxpayer’s valid signature and that the taxpayer intends to transmit the attached document to the IRS. An IRS employee may email documents to a taxpayer if that taxpayer consents and the IRS employee sends the document as a password-protected, secure zip attachment.
Hopefully, the IRS will also make this change permanent or set up a system in line with the New Jersey Division of Taxation’s option to upload documents and correspondence through their website. This could help minimize or eliminate the mailbox rule under which taxpayers need to prove that a document was filed timely.
Under the IRS’ People First Initiative, current audits will continue but will be conducted remotely and without in-person contact for the foreseeable future. Since documents provided to an agent cannot be explained in person as could be prior to the pandemic, it is important to spend additional time ensuring that it is clearly explained how the documentation supports the position(s) taken on the taxpayer’s tax return in order to minimize the possibility of the case heading to IRS Appeals. For those audits that have an assessed tax liability and the customary 20-percent penalty, it is probably safe to assume that COVID-19, if applicable, would provide reasonable cause to have the penalty abated.
Since the IRS was already dealing with limited resources for audits, it is doubtful that those resources could increase with the need to focus on COVID-19-related fraud and scams.
For taxpayers who have a balance due to the IRS and whose ability to produce income has been compromised by COVID-19, one option is to request a “currently not collectable” status. Taxpayers need to submit a financial statement (Form 433) showing that collection of the liability would create a hardship, leaving the taxpayer unable to meet necessary living expenses. If a taxpayer meets the requirements for reporting the account as uncollectable, then the IRS will suspend collection.
Those taxpayers who need to file their delinquent tax returns should do so as quickly as possible as well as enter into an installment agreement or an offer in compromise to obtain a fresh start. If qualified, the taxpayer will receive the economic stimulus payment or be able to claim it when filing their 2020 tax return.
As part of the stimulus relief, the IRS will not apply the stimulus payment against any balances owed, with one exception related to delinquent child support obligations.
Overall, the main takeaway of the federal and state tax law changes, as well as the Payroll Protection Program, Economic Injury Disaster Loan and the various other Small Business Administration (SBA) loans and state grants, is that an expert CPA has never been more valuable for the taxpayer, whether an individual or business.
This article appeared in the November/December 2020 issue of New Jersey CPA magazine. Read the full issue.